Swiss franc rise could hit growth

ZURICH: The Swiss government warned on Tuesday that safe-haven demand could push the strong Swiss franc still higher and seriously threaten growth as it cut its forecast for economic expansion in 2012.

While it stuck with its forecast for 2.1 percent growth this year, the State Secretariat for Economics (SECO) reduced its forecast for 2012 to 1.5 percent from 1.9 percent in March and lowered its forecasts for inflation to 0.7 percent for this year and next.

"In the light of the diverse global economic weaknesses and numerous uncertainties, the Swiss economy continues to face the risk of a further appreciation of the currency," it said in a statement.

"An additional strong pressure on the Swiss franc would however jeopardise economic growth to a serious degree."The Swiss National Bank will likely strike a similar chord when it issues its new growth and inflation forecasts during its monetary policy review on Thursday.

Although the Alpine economy is performing well with low joblessness and robust consumer spending the SNB is widely expected to keep rates on hold at ultra-low levels for fear of driving the franc still higher.

The franc has soared to records against both the euro and the dollar within the past two weeks, building upon double-digit appreciation against both currencies last year, and the central bank has warned growth could slow as exports suffer.

The recent resilience of Swiss exports was largely due to strong demand, particularly from emerging markets, the United States and Germany, the SECO said, but companies were already being forced to cut margins due to the strong franc.

There have been signs in recent months that growth in those economies is peaking and economists are increasingly concerned about the pace of expansion in the United States.

The expert group that drew up the government forecast said the real effective exchange rate of the Swiss franc against a weighted basket of currencies had now reached an all-time high, significantly higher than a peak reached in the mid 1990s.

"Given the growing doubts about the sustainability of high level of sovereign debt, the expert group assumes that the demand for safe currencies should continue," they said.

"Should the upward pressure on the Swiss franc persist, significant negative effects on export volumes can be expected in 2011 and 2012."

Copyright Reuters, 2011